Gamblers are leaving table as Lloyds left holding chips

WHEN it comes to the big players in the Scottish commercial property market, the game is almost over.

With the collapse last week of Edinburgh property developer Kilmartin, its chairman, Iain Wotherspoon, became one of the last to fold his hand and walk away. Other players to have lost all their chips include John Kennedy of Kenmore, Remo Dipre of Gladedale, Geoff Ball of Cala and Manish Chande of Mountgrange.

Sir David Murray, owner of Rangers FC and property firm PPG, is maintaining a good poker face and is keeping his cards close to his chest.

Hide Ad
Hide Ad

For the rest, the rules of the game changed when Lloyds Banking Group, rather than freewheeling HBOS, took over the dealing.

As a result, Lloyds is now holding all the chips in the form of a vast property portfolio. The question is how quickly it can cash them in?

Not very, is the answer, or risk facing further write-downs which it can ill-afford. Unlike its fellow big spender in the commercial property stakes, Royal Bank of Scotland, Lloyds walked away from the government's asset protection scheme. And while further losses at RBS are covered, Lloyds took a gamble that things were looking up.

But recovery in the property market is far from a sure bet. Sure, equities have been buoyant, but this hasn't been the case for property values.

Estimates that the UK residential market is still overvalued by 30 per cent will not be far from the mark for commercial property either.

Both were pumped up to unnatural extremes by cheap, too plentiful debt.

And both markets continue to be in a weird, unnerving stasis.

As transactions dried up – and continue to be a mere trickle compared with good or even mediocre years – no-one knew the value of anything.

Hide Ad
Hide Ad

Sure there are plenty of people who say that inquiries are up, or that sales are increasing just ever so slightly. But most of these reports come from the very industry that relies on positive sentiment to survive. It is a case of, "Of course, they would say that, wouldn't they?"

What is holding up the market is the very firms that now own the majority of it – the banks.

Fears of political backlash have prevented the government-controlled banks – Lloyds, RBS, Northern Rock – from repossessing homes. If they did, the deluge of cheap property assets on the market would show where the bottom was – as has traditionally been the case in previous property crashes.

In commercial property, the bank debt – a vast squishy bulk of it held by Lloyds – is also still acting as a cushion. Which is why so many complain that there is no bottom to that market either.

It is another reason why the vultures, or, rather, the "distressed asset funds", will have a while to wait yet before they can pick up some dirt-cheap bargains.

Assets owned by Kenmore, now controlled by Lloyds, for example, will take three to five years to sell off. That is because, in this still febrile market, as soon as they put a price on it, prices drop.

So Lloyds must play the long game. Or else the chips it has been hoarding up won't be worth much at all.

Rating the ratings agencies

RATINGS agency Fitch downgraded Iceland's sovereign credit ratings after that plucky little nation of 300,000 souls put its collective foot down on paying back the UK and the Netherlands. Their argument was that its intransigence risked messing up the only thing that would save it – good economic relations with the rest of the world.

Hide Ad
Hide Ad

The ratings agencies are gunning, too, for the UK's AAA rating. If government doesn't toe the line and show how it is going to pay down our huge burden of public debt, down will go its credit rating, too. This risks driving up the cost of servicing its debt considerably. But hang on just a minute. How is it that the ratings agencies are now calling the shots when it comes to the domestic policies of sovereign governments? Particularly when those same agencies failed to spot Enron, or the subprime mess that got us into this disaster in the first place.

Some economists are arguing that Iceland will be better off if it manages paying off the UK and Dutch governments on its own terms, rather than those set out in the punitive Icesave agreement. And, likewise, the UK should be free to determine how it will pay off its debt in a way that will benefit its people, not meet the demands of a failed analysis of credit worthiness.